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Pearlman bankruptcy sought

The investor fraud case could switch courts, which might aid in recovering assets.

By HELEN HUNTLEY
Published March 3, 2007

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The effort to recover millions of dollars lost in one of the state's largest investment frauds could be transferred from state courts to federal bankruptcy court.

Four lenders filed petitions this week to force music promoter Lou Pearlman and Trans Continental Airlines into involuntary bankruptcy. U.S. Bankruptcy Judge Arthur Briskman will decide whether to grant their request. The lenders say they are owed $64-million.

The state says Pearlman and Trans Continental ran a giant Ponzi scheme that promised FDIC-insured investments but never invested the money. Instead, the state says Pearlman used money from new investors to repay earlier investors, pay expenses for his various businesses and pad his own bank account.

A court-appointed receiver found Trans Continental owes more than $317-million to 1,800 investors, including $78-million owed to 800 investors in the Tampa Bay area. So far, receiver Jerry McHale said he hasn't found any assets that weren't already heavily encumbered with liens.

He said he has not decided what position he will take in the bankruptcy case.

"We're evaluating and don't anticipate doing anything till we've had a thorough time to review options," he said.

Bankruptcy courts have additional legal powers that could be useful in asset recovery.

"The bankruptcy system is designed to find hidden assets," said Christopher Peterson, University of Florida law professor. "The court can go back and void transfers of property."

Even investors who received interest payments or withdrawals in the 90 days before Thursday's filing might be ordered to pay money back. The court also can go after transfers to company insiders made within the last year and fraudulent transfers made within the last two years.

Distribution of any assets that are recovered could be contentious regardless of which court handles the case. One question is whether investors who bought stock in Trans Continental should be treated the same as those who invested in the savings plan. Both were victims of fraud, according to the state, but stockholders usually are last in line in bankruptcy court.

Clearwater lawyer Patrick Davis, who represents investors, said the lengthy bankruptcy process is likely to add to the frustration of investors.